Lessons from the courts: No tax safety in numbers

The IRS is rarely lenient when it comes to unpaid employment taxes that are withheld from employee paychecks. If you are found to be a responsible party, you could be held personally liable for 100% of the amount owed for a willful failure to deposit such withheld employment taxes on time. And you don’t necessarily have to be the person assigned to do the job.

What’s more, the IRS doesn’t have to single out just one person that has to pay the piper. This “100% penalty” may be assessed against multiple parties at the company.

New case: The founder of a trucking firm owned 80% of the company stock. He also served as its chief executive officer (CEO), president and treasurer. Annual compensation: $232,000. His right-hand man, the chief financial officer (CFO)and vice president, owned the remaining 20% of the stock. He was paid $180,000 a year.

On several occasions, the CFO advised the founder that the firm had failed to pay its employment taxes. Both officers were aware that the firm was experiencing severe economic difficulties. Still the CFO authorized payments to other creditors, totaling $1.8 million, out of the funds withheld for employment taxes. The IRS eventually assessed a penalty of more than $1 million after adding interest and penalties.

A District Court in Pennsylvania determined that the parties may be held “jointly and severally” responsible for the penalty. Reason: The founder knew that other creditors were being paid instead of the IRS. Also, his status as the CEO and president—as well as being the highest-paid employee—was a contributing factor. On the other hand, the CFO was the one who personally authorized the payments to other creditors. (Horovitz, DC-PA,2:06-CV-279, 2/11/08)

With joint and several liability, the IRS can collect the full amount owed—liability, penalties, taxes—from either party or both. However, if one party isn’t primarily responsible and pays a disproportionate amount, he or she may sue the other party in federal court for recovery of funds. The stakes are way too high to leave this matter to chance.

Tip: Pay the IRS fast and first. Designate backups to ensure that payroll withholdings collections and deposits are being handled properly.